Increase in guaranteed rates and likely increase in interest rates ahead will make non-par portfolio more attractive. HDFC Life has increased rates in its guaranteed savings offering.
We reiterate our ‘Buy’ rating on HDFC Life led by better outlook of non-par guaranteed portfolio, continued strong demand for protection and organic growth levers.
Increase in guaranteed rates and likely increase in interest rates ahead will make non-par portfolio more attractive. HDFC Life has increased rates in its guaranteed savings offering. When we look at derivative (FRA) MTMs, some peers have reported losses in FY21 indicating interest rates have been higher than the exercise rates of these derivatives. This, along with possible increase in interest rate outlook, will enable insurers to offer higher rates for their non-par guaranteed portfolio. HDFC Life is well placed to benefit from this.
Sum assured growth has also been healthy for HDFC Life: The individual sum assured market share for HDFC Life has improved from 11.7%/11.2% in FY20/21 to 14.3% FY22TD (data up to May’21). The group sum assured market share of HDFC Life stands at 9.3% as of May’21 compared to 24/12% in FY20/21 indicating a possible scope of improvement.
Covid claims remain a short-term concern: Depending upon the provisions already taken in FY21, insurers might have to take additional provisioning in FY22. However, this remains a one-off event (HDFC Life had no negative operational variance between FY16-20). Overall demand for protection remains very strong. Higher pricing and improved medical underwriting are available profit levers.
Reiterate Buy: We factor VNB margins of 27/28.5% with APE growth of 18/18% in FY22/FY23E. We expect HDLI to accumulate Rs 58.7bn of new business and Rs45.4bn of unwind (@8%) over FY22E / FY23E to reach an embedded value (EV) of Rs 358.3bn by FY23E. We value HDLI based on 40x new business value of Rs 33bn in FY23E to arrive at a target price of Rs 823.